Daily Market Commentary

EURO
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4450 level and was capped around the $1.4520 level. The common currency was pressured during Australian dealing after a Chinese official reported the U.S. dollar has likely hit the bottom while adding the yen still had room to decline. There is growing dissent apparent at the Federal Reserve. Kansas City Fed President Hoenig reported the Fed should conclude in March its program to purchase mortgage debt, as planned, because the private securities market is “healing.” Hoenig is calling for a “modest” and “persistent” economy despite last week’s lackluster December non-farm payrolls number. In contrast to Hoenig, St. Louis Fed President Bullard – speaking in China – suggested the U.S. may want to continue some of its expansionary policies, including the securities purchasing programs. Bullard also noted U.S. interest rates “may remain low for quite some time.” Friday’s weaker-than-expected and disappointing U.S. December non-farm payrolls data dented the view that the Fed may raise interest rates by the middle of the year. European Central Bank President Trichet yesterday called on global governments to reduce excessive budget deficits to satisfy investors. Trichet noted he sees a “progressive normalization of the economy” but called on market participants to “strengthen risk management significantly.” ECB member Nowotny yesterday said new risk-taking by some market participants is a concern for central bankers and regulators and that risk-taking needs to be limited by increases in capital requirements. Nowotny also confirmed there will be “sluggish” economic growth in the eurozone this year. Data released in the eurozone yesterday saw French November industrial output climb +1.1% and October’s print was upwardly revised. In U.S. news, data to be released in the U.S. today include November trade balance figures with estimates running around –US$ 34.5 billion. Euro bids are cited around the US$ 1.3885 level.

JPN/CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥92.40 level and was supported around the ¥91.80 level. Traders moved out of yen after shares in Japan Airlines declined 45% on speculation that the ailing airline is to file for bankruptcy imminently. Data released in Japan overnight saw the November current account surplus expand 76.9% y/y to ¥1.103 trillion, better-than-expected. Also, December bank lending was off 1.3% m/m and 3.1% y/y. Bank of Japan official Shinobu Nakagawa yesterday reported it is “possible” that official Japanese interest rates will remain near zero per cent until 2011 on account of the poor economic outlook. Nakagawa also reported the appreciating yen helps to support demand for Japanese government bonds. There is increasing speculation BoJ could increase its bond purchase activity to avert a relapse into another recession. Currently, the central bank purchases around ¥1.8 trillion in Japanese government bonds every month and it may decide to up its purchases to counter intense deflationary pressures. A new announcement could be made as early as H1 2010. An anonymous Ministry of Finance official reported finance minister Kan and U.S. Treasury Secretary Geithner agree on exchange rate policy. New finance minister Kan last week said it is his responsibility to respond to moves in the currency market but added the markets should determine rates. Last Thursday, Kan indicated the yen should be weaker whereas his predecessor, Fujii, green-lighted a stronger yen when he first took office last year. Chief Cabinet Secretary Hirano said the government should not make any comments that could impact the markets. Prime Minister Hatoyama last week said rapid exchange rate moves are “not good” and “unwelcome.” Most traders believe the Japanese government will probably try to orchestrate a weaker yen to help counter deflationary pressures and stimulate foreign trade. The Nikkei 225 stock index climbed 1.09% to close at ¥10,798.32 yesterday. U.S. dollar offers are cited around the ¥94.75 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥133.75 level and was supported around the ¥132.95 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥147.65 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥90.20 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8275 in the over-the-counter market, up from CNY 6.8263. The pair was volatile overnight as a Chinese sovereign wealth fund official reported the U.S. dollar reached “rock bottom” but added the yen still has room to decline. The official quickly noted these were his own opinions and not official public policy. He did, however, suggest that both the U.S. and China are likely to raise rates in H2 2010. Last week, People’s Bank of China guided interest rate expectations higher by selling three-month bills at higher rates for the first time in nineteen weeks. This evidences the central bank’s attempt to tighten liquidity. PBoC-watchers believe the central bank may lift interest rates for the first time in three years by September. There is increasing speculation that China’s economy could slow dramatically this year. People’s Bank of China yesterday reported it will support “relatively fast” economic growth and manage inflation expectations. Additionally, PBoC noted it will target “moderate” loan growth in 2010.

STERLING
The British pound depreciated sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6060 level and was capped around the $1.6120 level. Many data were released overnight. First, the December RICS house price balance declined to +30 from +35 in November, the first decline since February. Second, BRC December retail sales surged to a five-month high. Third, RICS reported house prices moderated last month. BCC noted the U.K. economy is improving but is “struggling to enter a recovery phase.” Former Bank of England Monetary Policy Committee member Buiter yesterday reported the central bank may start to raise interest rates by the middle of the year, possibly taking the Bank Rate to 0.75% to 1.00%. Buiter suggested the BoE’s rate hike could come before the European Central Bank contemplates one. The big news in the U.K. remains the general election that is scheduled to be called before June. Prime Minister Brown is attempting to rally the Labour Party following widespread discontent from within his own ranks. Tory opposition leader Cameron is pledging earlier and deeper deficit reductions. Cable bids are cited around the US$ 1.5730 level. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the ₤0.9010 level and was supported around the ₤0.8995 level.

SWISS
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0205 level and was supported around the CHF 1.0150 level. Data released in Switzerland yesterday saw November real retail sales up 0.6%. Swiss National Bank is expected to keep interest rates unchanged for at least the next couple of months. U.S. dollar offers are cited around the CHF 1.0615 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.4765 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6400 figure.